외교안보연구소 발간자료

Will the U.S. Be Able to Form a ‘Trusted Value Chain’?: Korea’s Perspective on Prospects and Implications 

Will the U.S. Be Able to Form a ‘Trusted Value Chain’?: Korea’s Perspective on Prospects and Implications 

Will the U.S. Be Able to Form a ‘Trusted Value Chain’?: Korea’s Perspective on Prospects and Implications 

미국

"Ⅰ. Restructuring of the U.S. Supply Chain: Domestic Base
Ⅱ. Restructuring of the U.S. SC: International Cooperation
Ⅲ. Assessment
Ⅳ. Prospects
Ⅴ. Policy Implications


Ⅰ. Restructuring of the U.S. Supply Chain: Domestic Base

The U.S. started full-fledged efforts to restructure its supply chain (SC) for decoupling from China\ recognizing its heavy dependence of the items\ critical for its economy and security on China in the wake of the COVID-19 pandemic and climate change.

President Biden directed the U.S. government to undertake a comprehensive review of critical items’ SCs\ and an interim report was released on June 8\ 2021. The report - “Building Resilient SCs\ Revitalizing American Manufacturing\ and Fostering Broad-Based Growth: 100-Day Reviews Under Executive Order 14017” identified four critical SC vulnerabilities – semiconductors\ large-capacity batteries\ critical minerals and materials\ and pharmaceuticals with active pharmaceutical ingredients (APIs). The report\ which proposed formulating industrial policies to rebuild the country’s production capabilities at home and cooperating with allies to address existing shortages\ will likely serve as a compass for the U.S. in recalibrating its strategy to promote resilience to leverage against China. 
 
The U.S. Innovation and Competition Acts (USICA)\ which passed the Senate on the same day\ signaled the revival of U.S. industrial policy. The USICA is a landmark competitiveness policy package expanded from the Endless Frontier Act. It aims to spend $200 billion on seven bills to foster R&D capabilities\ the semiconductor industry and to establish a critical SC resiliency program\ and so on from FY 2022 to 2026.
 
On September 23\ 2021\ the White House announced its plan to manage an Early Warning System to proactively address potential semiconductor SC disruptions to alleviate bottlenecks that have impacted a wide range of industry sectors in particular car production. Accordingly\ the next day\ the U.S. Department of Commerce officially required that Samsung Electronics\ SK Hynix and TSMC and other entities participating in the U.S. semiconductor SC at any level submit detailed information and data on capacity\ customers\ inventories\ etc. by November 8 on a voluntary base. 

On October 13\ the White House announced that the U.S. government would be involved in managing the ports of Los Angeles and Long Beach to resolve the logistics crisis that emerged abruptly while struggling to recover from the COVID-19 pandemic. In addition\ the Biden administration raised the need for global cooperation to resolve logistics bottlenecks\ expressing concerns that rising logistics costs will also cause inflation.


Ⅱ. Restructuring of the U.S. SC: International Cooperation

The U.S. administrations have firmly opposed China’s theft of advanced technologies\ unfair competition\ and actions that undermine human rights and democratic values\ and such stance has gained bipartisan support. Moreover\ with President Biden’s inauguration under the banner of pushing to reclaim America’s global leadership and restore the alliance\ efforts to deepen cooperation with allies to restructure its SCs began to accelerate. 
 
Immediately after taking office\ President Biden held summit meetings first with key security allies - Japan on April 16 and South Korea on May 21\ drawing two lines for SC collaboration with the two countries\ respectively. Japan agreed to cooperate on strengthening the semiconductor SC. By agreeing to comprehensive cooperation with South Korea\ the alliance has improved in quality\ and South Korea\ the only country that can cooperate in three of the four essential items to strengthen the U.S. SC\ has emerged as a critical partner of the U.S.
 
The U.S. formed the QUAD with Japan\ Australia\ and India to boost the resiliency of the semiconductor SC by broadening the scope of cooperation with Japan. In June\ the G7 summit created another area of cooperation by agreeing to strengthen SC resiliency for personal protection equipment and semiconductors. In addition\ the U.S.-EU Trade and Technology Council (TTC) held its first meeting in the U.S. on September 29. The TTC Inaugural Joint Statement stated that the organization's goal is to coordinate approaches to key global technology\ economic\ and trade issues\ as well as to deepen bilateral relations based on shared democratic values\ with an implicit reference to China. They will eventually form ten working groups; technology standards\ climate and clean tech\ secure SCs\ information and communication technology and services (ICTS) security and competitiveness\ data governance and technology platforms\ misuse of technology threatening security and human rights\ export controls\ investment screening\ promoting small- and medium-sized enterprises access to and use of digital tools\ and global trade challenges.
 
On October 31\ 2021\ President Biden held a meeting sidelined with the G20 summit to address the GSC crisis with 14 like-minded countries and the EU to further extend  the space for anti-China SC restructuring. The 14 countries (G14) include South Korea\ Japan\ Australia\ India\ Indonesia\ Singapore\ Canada\ Mexico\ Germany\ the Netherlands\ Spain\ Italy\ the U.K.\ and Congo (the world’s largest producer of Cobalt\ the main ingredient of batteries). This group aims to develop short-term solutions to address disruptions in GSCs spanning R&D\ intermediate goods\ manufacturing\ and logistics\ as well as long-term solutions to strengthen collective SC resilience. 


Ⅲ. Assessment

1. Blocization of Protectionism and ‘Trusted Value Chain’

The US government's top priority in terms of trade policy is to rebuild the SC to keep China out of the dual-use emerging and critical technologies SC. To that end\ Washington intends to enact strong industrial policies at home and foster multifaceted cooperation with like-minded partners on the international stage. Accordingly\ the global geopolitical conflict structure appears to be entering the stage of “blocization of protectionism\” transitioning from “the U.S. vs. China” to “the U.S.-led bloc vs. China.” Because grasping this US SC restructuring strategy based on a geo-economic concept like a global value chain (GVC) or a regional value chain (RVC) is limited\ this paper explores the strategy from a geopolitical perspective\ using the concept of ""trusted value chain(TVC)\"" which reflects the blocization of protectionism.
 
Except for highly sensitive strategic materials\ it is almost impossible for any country to strengthen the domestic value chain (DVC) of emerging and critical dual-use technologies alone in today's highly interdependent world. Likewise\ it is clear that the U. S. cannot prevent China from gaining access to critical technologies and data on its own. Furthermore\ the U.S. has no intention of relying on the WTO\ in which China has a strong position. Consequently\ It will most likely aim to establish a TVC with its allies that has a technological advantage in the high-tech sector. The inauguration of President Biden\ which prioritizes the US alliance\ appears to be a watershed moment in the blocization of protectionism. In its competition with China\ the United States emphasizes “shared values\ ”“like-mindedness\” and “trust.” Therefore\ DVC\ TVC\ RVC\ and GVC are likely to coexist until we see the outcomes of the US-China strategic competition to some extent\ depending on the key actors\ space for cooperation\ and items.
 

2. TVC’s Dual Expansion

As the United States has begun building a TVC with allies\ it is worth noting that the creation of TVC has expanded in two ways. The value chain’s scope is increasingly encompassing the full range of activities from R&D to manufacturing to logistics\ while the space of cooperation is expanding from a single dot (US) to several lines (Korea\ Japan\ Taiwan)\ and then to a plane (QUAD\ G7\ TTC\ G14). The G7 and the QUAD are leaving the door open for other allies\ and the TTC believes it is necessary to collaborate with allies on issues such as technology standards\ climate/cleantech\ export controls\ AI\ semiconductors\ ICTS\ and misuse of technology. 
 

Ⅳ. Prospects

Then\ how likely is it that a TVC will grow even further in the future\ dividing the world into two blocs in terms of global standards\ norms\ data\ and markets? The realization of trust and reciprocity within the TVC in state-to-state relations\ and the balance and harmony of security and market logic in state-to-market relations\ appear to be the primary conditions for a TVC to succeed as intended by the United States. The outlook\ on the other hand\ does not appear to be promising.


1. State-to-State Relations

Above all\ the United States’ diplomatic leadership is facing a crucial test. Biden’s pledge to restore alliances reflects America’s dwindling global standing. As a result\ only when the U.S. takes the lead in establishing mutual trust and reciprocity will its allies be motivated to join. This also applies to all TVC participating countries.
 
On the surface\ conditions seemed ripe for cooperation between the U.S. and the EU. The two sides reached a truce in a long-running dispute over commercial aircraft subsidies for Airbus and Boeing. In addition\ the Biden administration eased tariffs on steel and aluminum imports from the EU imposed by the Trump administration under Section 232 of the Trade Expansion Act of 1962. However\ a week before the first meeting of the TTC\ the two sides ran into roadblocks; the Australia-France submarine deal collapsed\ which was followed by the announcement of the AUKUS pact. These discouraging developments are somewhat related to the fishing dispute between the UK and France. Even in Australia\ a member of the QUAD\ AUKUS\ and the Five Eyes partnership\ some experts question the United States’ reliability. Washington stood by and did nothing  when Beijing threatened Canberra with retaliatory measures after an Australian proposal for an independent international inquiry into the origins of the coronavirus outbreak. Also\ Korea and Japan – key U.S. allies in East Asia – are locked in bilateral historical and trade disputes and have avoided communication over the past years. Japan views Taiwan as the best partner for the revival of the Japanese semiconductor industry. But bewildered by Japan’s export controls on chemicals vital to the South Korean chip industry\ Taiwan is trying to decouple from Japan four out of 28 items that Taiwanese firms rely heavily on Japanese suppliers. 
  

2. State-to-Market Relations

Another key ingredient for the TVC’s success is striking the right balance between national security logic and market logic. The market is still based on a fundamental principle: efficiency. It is feared that excessive government intervention in the market under the guise of national security in the era of globalization - such as the Trump administration’s imposition of high tariffs on steel and aluminum imports from allies under Section 232 of the Trade Expansion Act of 1962 – will allow the harmful effects of industrial policy to reoccur. Government support for specific industries and overprotection of domestic firms may sap the vitality of the private sector and result in a “crowding out” effect. Such practices may also lead governments to subsidies competition and overlapping investments\ which in turn would cause overproduction and dumping exports. This will significantly increase the likelihood of trade disputes between allies. 
  
The United States government’s request for trade secrets from foreign firms investing in the country for economic security reasons appears to defy market logic. It is also a self-contradictory behavior that mimics Chinese practices. The U.S. administration has accused China of stealing trade secrets from American firms\ describing it as unfair Chinese trading practices. The Phase One agreement signed by the United States and China commits China to no longer requiring US companies to hand over technology and trade secrets in exchange for access to the Chinese market. Given the terms of the agreement\ the United States is likely to face criticism that its actions are not significantly different from what China has done in the past. Furthermore\ it is questionable whether the US government can ensure that US rival firms do not gain access to trade secrets provided to the government by foreign firms.
  

Ⅴ. Policy Implications

Understanding the United States’ SC restructuring strategy through the lens of protectionism blocization and the establishment of a U. S.-led “Trusted Value Chain” provides insight into how the Korean government can shape its SC strategy. In today’s highly interdependent world\ neither the establishment of a DVC nor a complete decoupling of the U. S. and China is possible. With the WTO’s multilateralism severely weakened\ multi-layered collaboration and cooperation with trustworthy countries is unavoidable. As a consequence\ Korea can consider a realistic and adaptable strategy for distributing its SC across DVC\ GVC\ RVC\ and TVC based on the unique characteristics of each item and organically linking them while selecting partners for each value chain.
  
Participation in a U.S.-led TVC is unavoidable in terms of emerging and critical dual-use technology\ as TVC will be joined by several countries with technological expertise critical to the success of Korea’s climate change response and digital transformation. Participation in TVC is a reasonable choice for Seoul\ which is a member of the OECD as well as a guest nation invited to join the G7. With the United States seeking a dual expansion in the creation of TVC\ Korea will be able to strengthen its bargaining power and have a greater say in its strategy and future. In this context\ Korea’s participation in the CPTPP should be reconsidered. However\ for the time being\ efforts should be made to pave the way for the successful creation of TVC.
  
Cooperation with China – the world’s factory and largest market – is critical when it comes to joining RVC and GVC. China is Korea’s indispensable partner in addressing a wide range of global issues\ including climate change\ the Covid-19 pandemic\ and inequality. Given the importance of working together with China\ the Korean government should give more consideration to Seoul’s participation in the Regional Comprehensive Economic Partnership (RCEP) which will finally take effect in January 2022 after all the twists and turns. 
  
Restructuring the SC of advanced technologies will have a significant impact on Korea's economy\ as well as its diplomatic and security landscape. Seoul should develop an economic security strategy that reflects the realities of the country\ including a SC restructuring strategy. Furthermore\ it is suggested that the Korean government establish related governance in order to navigate its way forward.


* Attached the File"

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